-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E+aWMXppSvVlhtcEPuJ7y6sK2z2lTSgPQAlS4x2jtHba5N5sz9tNzucaQOFgAE6f fTIvCiFH7OGNXYw1Osx8NQ== 0000950124-97-005868.txt : 19971114 0000950124-97-005868.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950124-97-005868 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERAL MOGUL CORP CENTRAL INDEX KEY: 0000034879 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 380533580 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01511 FILM NUMBER: 97714668 BUSINESS ADDRESS: STREET 1: 26555 NORTHWESTERN HGWY CITY: SOUTHFIELD STATE: MI ZIP: 48034 BUSINESS PHONE: 3133547700 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Period Ended September 30, 1997 -------------------------------------------- Commission File Number 1-1511 -------------------------------------------- FEDERAL-MOGUL CORPORATION ----------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Michigan 38-0533580 - ------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 26555 Northwestern Highway, Southfield, Michigan 48034 - ----------------------------------------------------------------- Address of principal executive offices) (Zip Code) (248) 354-7700 - ------------------------------------------------------------------ (Registrant's telephone number, including area code) Not Applicable - ------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements for the past 90 days. Yes X No ---------------- ----------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latestpracticable date: Common Stock - 40,194,443 shares as of November 7, 1997 2 FORWARD-LOOKING STATEMENTS INFORMATION CONTAINED OR INCORPORATED IN THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE NOT HISTORICAL FACTS AND WHICH INVOLVE CERTAIN RISKSAND UNCERTAINTIES AND, ACCORDINGLY, ACTUAL RESULTS EVENTS AND PERFORMANCE COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS. 3 PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 -------------------- ---------------------- (As Restated) (As Restated) 1997 1996 1997 1996 -------- -------- ---------- ---------- (Millions of Dollars, Except Per Share Amounts) Net sales $ 424.2 $ 492.4 $1,391.6 $1,551.9 Cost of products sold 321.4 409.2 1,061.4 1,238.0 ------- ------- ------- ------- Gross margin 102.8 83.2 330.2 313.9 Selling, general and administrative expenses 74.0 79.7 225.9 243.7 Adjustment of assets held for sale to fair value - 6.4 - 6.4 Reengineering, severance and other related charges - 5.6 - 5.6 Interest expense 6.5 11.0 25.3 32.8 Interest income (2.4) (.6) (4.2) (2.1) International currency exchange losses - .7 - 3.0 Other, net (2.9) .3 (1.3) 1.4 ------- ------- ------- ------- Earnings (Loss) Before Income Taxes and Extraordinary Item 27.6 (19.9) 84.5 23.1 Income taxes 10.2 (7.3) 24.7 8.6 ------- ------- ------- ------- Net Earnings (Loss) Before Extraordinary Item 17.4 (12.6) 59.8 14.5 Extraordinary item - loss on early retirement of debt, net of applicable income tax benefit - - 2.6 - ------- ------- ------- ------- Net Earnings (Loss) 17.4 (12.6) 57.2 14.5 Preferred stock dividends, net of tax benefits .6 2.2 4.9 6.6 ------- ------- ------- ------- Net Earnings (Loss) Available for Common Shares $ 16.8 $ (14.8) $ 52.3 $ 7.9 ======= ======= ======= ======= Earnings (Loss) Per Common Share Primary Income (loss) before extraordinary item $ .45 $(.41) $1.52 $ .23 Extraordinary item - loss on early retirement of debt, net of applicable income tax benefit - - (.07) - ---- ---- ---- ---- Net Earnings (Loss) $ .45 $(.41) $1.45 $ .23 ==== ==== ==== ==== Fully Diluted Income (loss) before extraordinary item $ .40 $(.41) $1.39 $ .23 Extraordinary item - loss on early retirement of debt, net of applicable income tax benefit - - (.06) - ---- ---- ---- ---- Net Earnings (Loss) $ .40 $(.41) $1.33 $ .23 ==== ==== ==== ====
See accompanying notes. 4 FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Millions of Dollars)
September 30 December 31, 1997 1996 ------------ ------------ (Unaudited) Assets Current Assets: Cash and equivalents $ 20.5 $ 33.1 Accounts receivable (net of allowance for doubtful accounts of $17.1 million and $16.3 million) 239.4 231.3 Inventories 291.9 417.0 Prepaid expenses and income tax benefits 92.5 81.5 ------- ------- Total Current Assets 644.3 762.9 Property, Plant and Equipment 312.8 350.3 Goodwill 146.3 154.0 Other Intangible Assets 60.7 63.1 Business Investments and Other Assets 133.0 124.9 ------- ------- Total Assets $1,297.1 $1,455.2 ======= ======= Liabilities and Shareholders' Equity Current Liabilities: Short-term debt $ 42.1 $ 280.1 Accounts payable 123.0 142.7 Accrued compensation 45.9 37.6 Other accrued liabilities 192.4 203.4 ------- ------- Total Current Liabilities 403.4 663.8 Long-Term Debt 278.5 209.6 Postemployment Benefits 199.3 207.1 Other Accrued Liabilities 67.9 56.2 ------- ------- Total Liabilities 949.1 1,136.7 Shareholders' Equity: Series D preferred stock - 76.6 Series C ESOP preferred stock 49.7 53.1 Unearned ESOP compensation (25.1) (28.4) Common stock 200.3 175.7 Additional paid-in capital 350.7 283.5 Accumulated deficit (154.6) (193.0) Currency translation and other (73.0) (49.0) ------- ------- Total Shareholders' Equity 348.0 318.5 ------- ------- Total Liabilities and Shareholders' Equity $1,297.1 $1,455.2 ======= =======
See accompanying notes. 5 FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30 -------------------- 1997 1996 -------- -------- (Millions of Dollars) Cash Provided From (Used By) Operating Activities Net earnings $ 57.2 $ 14.5 Adjustments to reconcile net earnings to net cash provided from operating activities Depreciation and amortization 40.7 46.4 Deferred income taxes 5.3 (.7) Postemployment benefits 1.1 1.8 (Increase) decrease in accounts receivable (51.2) 8.3 Decrease in inventories 48.2 33.3 Increase (decrease) in accounts payable 1.1 (12.4) Increase in current liabilities and other 34.9 30.2 Adjustment of assets held for sale to fair value - 6.4 Reengineering, severance and other related charges - 5.6 Loss on early retirement of debt 4.1 - Payments against restructuring and reengineering reserves (15.9) (13.2) ----- ----- Net Cash Provided From Operating Activities 125.5 120.2 Cash Provided From (Used By) Investing Activities Expenditures for property, plant and equipment (29.9) (34.7) Proceeds from sale of business investments 78.7 11.0 Purchases of business investments - (.3) ----- ----- Net Cash Provided From (Used By) Investing Activities 48.8 (24.0) Cash Provided From (Used By) Financing Activities Issuance of common stock 12.0 .4 Fees for early retirement of debt (4.1) - Fees related to issuance of debt (9.4) - Net decrease in debt (163.6) (57.6) Dividends (18.2) (19.4) Other (3.6) (3.4) ----- ----- Net Cash Used By Financing Activities (186.9) (80.0) ----- ----- Increase (Decrease) in Cash and Equivalents (12.6) 16.2 Cash and Equivalents at Beginning of Period 33.1 19.4 ----- ----- Cash and Equivalents at End of Period $ 20.5 $ 35.6 ===== =====
See accompanying notes. 6 FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 1997 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K/A for the year ended December 31, 1996. 2. EARNINGS PER COMMON SHARE The computation of primary earnings per share is based on the weighted average number of outstanding common shares during the period plus, when their effect is dilutive, common stock equivalents consisting of certain shares subject to stock options. Fully diluted earnings per share additionally assumes the conversion of outstanding Series C ESOP and Series D preferred stock and the contingent issuance of common stock to satisfy the Series C ESOP preferred stock redemption price guarantee when their effect is dilutive. The number of contingent shares used in the fully diluted calculation is based on the market price of the common stock on September 30, 1997 and the number of preferred shares held by the Employee Stock Ownership Plan (ESOP) that were allocated to participants'accounts as of September 30 of each of the respective years. The primary weighted average number of common and equivalent shares outstanding (in thousands) was 37,490 and 36,050 for the three- and nine-month periods ended September 30, 1997, and 35,097 and 35,088 for the three- and nine-month periods ended September 30, 1996. The fully diluted weighted average number of common and equivalent shares outstanding (in thousands) was 42,016 and 41,839 for the three- and nine-month periods ended September 30, 1997, and 35,097 and 35,122 for the three- and nine-month periods ended September 30, 1996, respectively. Net earnings used in the computations of primary earnings per share are reduced by preferred stock dividend requirements. Net earnings used in the computation of fully diluted earnings per share are reduced by amounts representing the preferred stock dividends when their effect is anti-dilutive and amounts representing the additional after-tax contribution that would be necessary to meet ESOP debt service requirements under an assumed conversion of the Series C ESOP preferred stock when their effect is dilutive. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997. The adoption of SFAS No. 128 would not materially impact the results of the earnings per share calculation for the three months and the nine months ended September 30, 1997 and 1996 and is not expected to materially impact the results of the earnings per share calculation for the year ended December 31, 1997. Quarterly dividends of $.12 per common share were declared for both the first, second and third quarters of 1997 and 1996. 3. INVENTORIES At September 30, 1997 and December 31, 1996, inventories consisted of the following: 1997 1996 ------ ------ Finished products $274.9 $417.0 Work-in-process 21.1 28.0 Raw materials 15.3 20.0 ----- ----- 311.3 465.0 Reserve for inventory valuation (19.4) (48.0) ----- ----- $291.9 $417.0 ===== ===== The $28.6 million decrease in the reserve for inventory valuation resulted primarily from the Company's initiative to dispose of slow moving and obsolete inventory that was fully reserved and the sales of certain international retail and wholesale businesses. As such, the reduction in the inventory reserves related to this initiative did not affect the Company's 1997 earnings. 7 4. DEBT In June 1997, the Company entered into a new $350 million multicurrency revolving credit facility agreement with a consortium of international banks which matures in June 2002. This new agreement replaces the exiting U.S. and European revolving credit facilities and has similar pricing terms. The revolving credit facility contains restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. As of September 30, 1997, there were no borrowings outstanding against the revolving credit facility. In April 1997, the Company issued $125 million of 10-year 8.8% senior notes. 5. ADJUSTMENT OF ASSETS HELD FOR SALE The Company received $78.7 million in cash for businesses sold in the first nine months of 1997, while the purchasers assumed certain liabilities. The results of operations have been included in the Company's consolidated statements of earnings through the date of sale for the following transactions. In January 1997, the Company completed the previously announced sale of its heavy wall bearing division in Germany and Brazil to Zollern BHW Gleitlager GmbH, a member of Fuerstlich Hohenzollernsche Werke Laucherthal GmbH Co. On May 13, 1997, the Company completed the previously announced sale of its Australian replacement operations to Automotive Components Limited. On June 3, 1997, the Company completed the previously announced sale of its South African replacement operations. The Company sold the distribution operations to Chariots Holding Limited and the retail operations to Lexshell 16 Investment Holdings (Proprietary) Limited. The Company continually reviews and updates its impairment reserves related to the divestiture of its remaining retail/wholesale replacement operations and adjusts the reserve components to approximate the net fair value of its remaining businesses held for sale. There has been no net effect on the 1997 statement of earnings related to the above events. 6. INCOME TAXES During the second quarter of 1997, the Company recognized an income tax benefit of $6.8 million related to the sales of the South African and Australian businesses. 7. EXTRAORDINARY ITEM During the second quarter of 1997, the Company retired $64.7 million in private placement debt. The early retirement of the debt required a make-whole payment of $4.1 million, which was recorded as an extraordinary item of $2.6 million, net of the related tax benefit. 8. REDEMPTION OF SERIES D CONVERTIBLE EXCHANGEABLE PREFERRED STOCK On August 8, 1997, the Company announced its call for the redemption of all its outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. Upon calling for redemption, these preferred stockholders elected to convert each preferred share into 2.778 shares of common stock. On August 28, 1997, the Company issued 4.4 million shares of common stock in exchange for all of the outstanding Series D convertible exchangeable preferred stock. 9. RESTATEMENT In August 1997, the Company filed a Form 10-K/A which restated the previously issued 1996 financial statements for certain charges recorded in 1996. The restatement did not affect the Company's balance sheet at December 31, 1996. The corrections primarily pertained to timing in the recognition of the provision for doubtful accounts and customer incentive programs, the recognition of vendor rebates and the recognition of certain federal income tax credits. The following summarizes the net effect of these adjustments on the three and nine-month periods ended September 30, 1996, in millions: Three Months Nine Months Ended Ended September 30 September 30 1996 1996 ------------ ------------ Earnings (loss) before income taxes: As previously reported $ (27.4) $ 14.4 As restated (19.9) 23.1 Net earnings (loss): As previously reported (17.3) 9.1 As restated (12.6) 14.5 Earnings (loss) per common share: As previously reported (.56) .07 As restated (.41) .23 Accumulated deficit at December 31, 1996: As previously reported (193.0) (193.0) As restated (193.0) (193.0) 8 10. SUBSEQUENT EVENT T&N Offer: On October 16, 1997, the Company announced it had made a cash offer to acquire all the outstanding common stock of T&N plc for 260 pence per share. The offer values T&N's share capital at $2.4 billion. In addition, the Company will assume the debt of T&N at closing. The Company will finance the acquisition through a committed bank facility from Chase Manhattan Bank. The Company's intention is to put in place a permanent capital structure of a combination of equity and debt financing. The offer is subject to various conditions customary in the United Kingdom, including acceptances of the offer by T&N shareholders and the receipt of all applicable regulatory approvals in the United States and Europe. As part of the acquisition process, certain financing, professional and other related fees have been and will continue to be incurred in 1997. These fees have been capitalized as incurred and will be accounted for as direct acquisition or financing costs once the transaction closes. Management fully expects the acquisition to close, however, in the event the acquisition is not completed, these fees would be charged to expense and would materially impact net earnings at that time. The Company may elect to accelerate payment of certain portions of the bank facility which would result in an extraordinary charge due to the write-off of the financing cost associated with the early retirement of debt. In addition, as part of financing the acquisition, the Company purchased for $28.1 million a foreign currency option with a notional amount of $2.5 billion to cap the effect of potential unfavorable fluctuations in the British pound/ U.S. dollar exchange rate. The cost of the option and its change in fair value will be reflected in the results of operations in the fourth quarter of 1997. The option's fair value will exceed its cost if the British pound to U.S. dollar exchange rate exceeds $1.667 at its expiration date in the first quarter of 1998. At closing on November 10, 1997, the British pound to U.S. dollar exchange rate was $1.697. Restricted Stock: In October 1997, the Company met certain share price performance criteria under the 1989 Long-Term Incentive Plan which resulted in the recognition of $5.4 million in compensation expense related to vesting of restricted stock. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES Sales for the third quarter of 1997 were $424.2 million compared to $492.4 million in the same 1996 quarter. North American original equipment sales were $108.4 million in the third quarter of 1997 compared to $110.9 million in 1996. Excluding the electrical products and ball bearing operation divestitures, North American original equipment sales were up 13.8% largely due to continued strong sealing systems and engine bearing product demand. International original equipment sales decreased 28.0% to $37.2 million from $51.7 million in the same 1996 quarter. Excluding the sale of the heavy wall bearing operations in Germany and Brazil and foreign currency effects, International original equipment sales increased 13.2% primarily due to continued strong sputter bearing demand. North American replacement sales decreased 2.3% to $177.2 million from $181.3 million in the third quarter of 1996. The decrease was attributable to continued weak demand in engine products. International replacement third quarter 1997 sales were $101.4 million compared to $148.5 million for the third quarter of 1996. Excluding the effects of exchange and the divestitures in Turkey, Australia and South Africa, International replacement sales were up 6.0%. The increase is primarily due to increased demand of suspension and anti-friction bearings in Mexico. COST OF PRODUCTS SOLD Cost of products sold as a percent of net sales decreased to 75.8% for the third quarter of 1997 from 83.1% for the third quarter of 1996. The decrease in cost of products sold as a percent of net sales is attributable to changes in accounting estimates related to sales incentive programs and obsolete inventory in the third quarter of 1996 as well as productivity improvements, cost controls and streamlined operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES While declining to $74.0 million, selling, general and administrative expenses as a percent of net sales increased to 17.4% for the third quarter of 1997 compared to 16.2% for the same 1996 period. The increase is attributable to additional incentive compensation expense of $1.6 million and compensation expense related to the vesting of restricted stock of $3.1 million, both due to improved Company performance. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30, 1996 NET SALES Sales for the nine-month period ended September 30, 1997 were $1,391.6 million compared to $1,551.9 million for the same 1996 period. North American original equipment sales were $337.7 million for the nine-month period ended September 30, 1997 compared to $341.8 million in 1996. Excluding the electrical products and ball bearing operation divestitures, North American original equipment sales were up 15.8% largely due to strong sealing system product demand. International original equipment sales decreased 24.1% to $126.2 million for the nine-month period ended September 30, 1997 from $166.2 million in the same 1996 period. Excluding the sale of the heavy wall bearing operations in Germany and Brazil and foreign currency effects, International original equipment sales increased 8.9%. North American replacement sales decreased 6.8% to $549.2 million from $589.0 million for the nine-month period ended September 30, 1996. The decrease was attributable to softness in the North American replacement market, particularly in engine and chassis products. International replacement sales for the nine-month period ended September 30, 1997 were $378.5 million compared to $454.9 million for the same 1996 period. Excluding the effects of exchange and the divestitures in Turkey, Australia and South Africa, International replacement sales were up 5.8%. COST OF PRODUCTS SOLD Cost of products sold as a percent of net sales decreased to 76.3% for the nine-month period ended September 30, 1997 from 79.8% for the same 1996 period. The decrease in cost of products sold as a percent of net sales is attributable to changes in estimates of sales in incentive programs and obsolete inventory in the third quarter as well as productivity improvements, cost controls and streamlined operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES While declining to $225.9 million, selling, general and administrative expenses as a percent of net sales increased to 16.2% for the nine-month period ended September 30, 1997 compared to 15.7% for the same 1996 period. The increase is primarily attributable to additional incentive compensation expense of $1.6 million and compensation expense related to vesting of restricted stock of $3.1 million, both due to improved Company performance. 10 ADJUSTMENT OF ASSETS HELD FOR SALE The Company received $78.7 million in cash for businesses sold in the first nine months of 1997, while the purchasers assumed certain liabilities. The results of operations have been included in the Company's consolidated statements of earnings through the date of sale for the following transactions. In January 1997, the Company completed the previously announced sale of its heavy wall bearing division in Germany and Brazil to Zollern BHW Gleitlager GmbH, a member of Fuerstlich Hohenzollernsche Werke Laucherthal GmbH Co. On May 13, 1997, the Company completed the previously announced sale of its Australian replacement operations to Automotive Components Limited. On June 3, 1997, the Company completed the previously announced sale of its South African replacement operations. The Company sold the distribution operations to Chariots Holding Limited and the retail operations to Lexshell 16 Investment Holdings (Proprietary) Limited. The Company continually reviews and updates its impairment reserves related to the divestiture of its remaining retail/wholesale replacement operations and adjusts the reserve components to approximate the net fair value of its remaining businesses held for sale. There has been no net effect on the 1997 statement of earnings related to the above events. INCOME TAXES During the second quarter of 1997, the Company recognized an income tax benefit of $6.8 million related to the sales of the South African and Australian businesses during the second quarter. EXTRAORDINARY ITEM During the second quarter of 1997, the Company retired $64.7 million in private placement debt. This eliminated 10% coupon debt and potentially restrictive covenants and will provide the Company greater financial flexibility. The early retirement of the debt required a make-whole payment of $4.1 million, which was recorded as an extraordinary item of $2.6 million, net of the related tax benefit. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations of $125.5 million for the nine-month period ended September 30, 1997 increased 4.4% from $120.2 million for the same 1996 period. The increase in cash flow from operations is due to increased earnings combined with decreased inventory levels. Inventory reduction increased over the 1996 period due to a decrease in lead times and lot sizes and an increase in fill rates in the North American replacement business as well as reductions in inventory in the international replacement business. The increase in accounts receivable is primarily due to $32 million of payments on the accounts receivable securitization. Cash flow from investing activities of $48.8 million for the nine-month period ended September 30, 1997 includes $78.7 million of proceeds from the sales of the heavy wall bearing division in Germany and Brazil, and 64 retail stores and 17 warehouse locations in Turkey, Australia and South Africa. Cash flow from investing activities also includes capital expenditures of $29.9 million for property, plant and equipment and equipment to implement process improvements, information technology and new product introductions. Cash flow used by financing activities of $186.9 million for the nine-month period ended September 30, 1997 reflects a reduction in borrowings of $163.6 million. The cash used to reduce borrowings was primarily generated from operations and proceeds from the sales of businesses noted above. In April 1997, the Company issued $125 million of 10-year 8.8% senior notes. Proceeds from the senior notes were used to pay down the revolving credit facility. Also during the nine-month period ended September 30, 1997, the Company retired $64.7 million in private placement debt using its revolving credit facility. This retirement eliminated 10% coupon debt and potentially restrictive covenants and will provide the Company greater financial flexibility. The early retirement of debt required a make-whole payment of $4.1 million which decreased cash from financing activities. Also in the first quarter of 1997, the Company entered into a new $100 million accounts receivable securitization program which replaced a similar agreement, and in the second quarter of 1997, the Company entered into a new 5-year $350 million revolving credit agreement which expires in June 2002. On August 8, 1997, the Company announced its call for the redemption of all its outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. Upon calling for redemption, these preferred stockholders elected to convert each preferred share into 2.778 shares of common stock. On August 28, 1997, the Company issued 4.4 million shares of common stock in exchange for all of the outstanding Series D convertible exchangeable preferred stock. The Company believes that cash flow from operations, together with borrowings available under the Company's revolving credit facility, will continue to be sufficient to meet its ongoing working capital requirements. 11 RESTATEMENT In August 1997, the Company filed a Form 10-K/A which restated the previously issued 1996 financial statements for certain charges recorded in 1996. The restatement did not affect the Company's balance sheet at December 31, 1996. The corrections primarily pertained to timing in the recognition of the provision for doubtful accounts and customer incentive programs, the recognition of vendor rebates and the recognition of certain federal income tax credits. The following summarizes the net effect of these adjustments on the three and nine-month periods ended September 30, 1996, in millions: Three Months Nine Months Ended Ended September 30 September 30 1996 1996 ------------ ------------ Net earnings (loss): As previously reported $ (17.3) $ 9.1 As restated (12.6) 14.5 SUBSEQUENT EVENT T&N Offer: On October 16, 1997, the Company announced it had made a cash offer to acquire all the outstanding common stock of T&N plc for 260 pence per share. The offer values T&N's share capital at $2.4 billion. In addition, the Company will assume the debt of T&N at closing. The Company will finance the acquisition through a committed bank facility from Chase Manhattan Bank. The Company's intention is to put in place a permanent capital structure of a combination of equity and debt financing. The offer is subject to various conditions customary in the United Kingdom, including acceptances of the offer by T&N shareholders and the receipt of all applicable regulatory approvals in the United States and Europe. As part of the acquisition process, certain financing, professional and other related fees have been and will continue to be incurred in 1997. These fees have been capitalized as incurred and will be accounted for as direct acquisition or financing costs once the transaction closes. Management fully expects the acquisition to close, however, in the event the acquisition is not completed, these fees would be charged to expense and would materially impact net earnings at that time. The Company may elect to accelerate payment of certain portions of the bank facility which would result in an extraordinary charge due to the write-off of the financing cost associated with the early retirement of debt. In addition, as part of financing the acquisition, the Company purchased for $28.1 million a foreign currency option with a notional amount of $2.5 billion to cap the effect of potential unfavorable fluctuations in the British pound/ U.S. dollar exchange rate. The cost of the option and its change in fair value will be reflected in the results of operations in the fourth quarter of 1997. The option's fair value will exceed its cost if the British pound to U.S. dollar exchange rate exceeds $1.667 at its expiration date in the first quarter of 1998. At closing on November 10, 1997, the British pound to U.S. dollar exchange rate was $1.697. Restricted Stock: In October 1997, the Company met certain share price performance criteria under the 1989 Long-Term Incentive Plan which resulted in the recognition of $5.4 million in compensation expense related to vesting of restricted stock. 12 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings On August 30, 1995, Zeller Corporation, an auto parts supplier, filed a lawsuit against the Company and Neapco, Inc. in the United States District Court for the Northern District of Ohio, Western Division, seeking damages for alleged violations of federal antitrust laws and certain state laws. On June 25, 1996, the judge dismissed the federal antitrust law claims. Zeller has appealed the dismissal to the United States Court of Appeals for the Sixth Circuit. After consulting with counsel for the Company, management believes that the case will be dismissed on appeal. Item 5. Other On October 16, 1997, Federal-Mogul and T&N plc announced they had agreed to the terms of a recommended cash offer by Federal-Mogul of 260 pence per share for the entire issued share capital of T&N. The offer values T&N's issued share capital at $2.4 billion. In addition, Federal-Mogul may or may not refinance the existing debt of T&N at closing. Federal-Mogul indicated that the acquisition of T&N would: - create a highly competitive Tier I automotive supplier worldwide; - expand its manufactured product portfolio to offer systems and modules; - enhance Federal-Mogul's position as a supplier of engine and transmission products worldwide; - reinforce Federal-Mogul's ability to provide a high quality service to both its original equipment and aftermarket customers; - extend Federal-Mogul's international reach and accelerate its worldwide aftermarket growth; - create an organization which builds on the strength of the leadership, expertise and working practices of both companies to further improve efficiencies. The Offer is subject to various conditions customary in the United Kingdom, including acceptances of the Offer by T&N shareholders and the receipt of all applicable regulatory approvals in the United States and in Europe. Federal-Mogul will fund the transaction through a bridge facility provided by The Chase Manhattan Bank. Federal-Mogul's intention is to put in place a permanent capital structure that reflects its financial goals. Permanent financing will be an appropriate combination of equity and debt. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 11.1 Statement Re Computation of Per Share Earnings for the three months ended September 30, 1997. 11.2 Statement Re Computation of Per Share Earnings for the nine months ended September 30, 1997. 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the three months ended September 30, 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the undersigned, thereunto duly authorized. FEDERAL-MOGUL CORPORATION By: (Thomas W. Ryan) --------------------------- THOMAS W. RYAN Senior Vice President and Chief Financial Officer By: (Kenneth P. Slaby) --------------------------- KENNETH P. SLABY Vice President and Controller and Chief Accounting Officer Dated: November 12, 1997 EX-11.1 2 STATEMENT 1 EXHIBIT 11.1 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED PRIMARY FULLY DILUTED -------------- --------------- SEPTEMBER 30 1997 1996 1997 1996 - ------------------------------------------ ------ ------ ------ ------ EARNINGS: (In Millions) Net earnings $ 17.4 $(12.6) $ 17.4 $(12.6) Series C preferred dividend requirements (.6) (.6) (.6) Series D preferred dividend requirements (1.6) (1.6) Additional required ESOP contribution (.5) ----- ----- ----- ----- Net earnings available for common and equivalent shares $ 16.8 $(14.8) $ 16.9 $(14.8) ===== ===== ===== ===== WEIGHTED AVERAGE SHARES: (In Millions) Common shares outstanding 37.1 35.1 37.1 35.1 Dilutive stock options outstanding .4 .4 Conversion of Series C preferred stock 1.6 Conversion of Series D preferred stock 2.9 ----- ----- ----- ----- Common and equivalent shares outstanding 37.5 35.1 42.0 35.1 ===== ===== ===== ===== PER COMMON AND EQUIVALENT SHARE: Net earnings $ .45 $ (.41) $ .40 $ (.41) ===== ===== ===== =====
[FN] In August 1997, the Series D preferred stock was converted into common stock, and no dividend was paid for the three-month period ended September 30, 1997. Amount represents the additional after-tax contribution that would be necessary to meet the ESOP debt service requirements under an assumed conversion of the Series C preferred stock. Amount represents the weighted average number of common shares issued assuming conversion of preferred stock outstanding. Amount represents the weighted average number of shares not included in the number of weighted-average common shares outstanding to reflect the 4.4 million shares converted. EX-11.2 3 STATEMENT 1 EXHIBIT 11.2 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
FOR THE NINE MONTHS ENDED PRIMARY FULLY DILUTED -------------- --------------- SEPTEMBER 30 1997 1996 1997 1996 - ------------------------------------------ ------ ------ ------ ------ EARNINGS: (In Millions) Net earnings before extraordinary item $ 59.8 $ 14.5 $ 59.8 $ 14.5 Series C preferred dividend requirements (1.8) (1.9) (1.9) Series D preferred dividend requirements (3.1) (4.7) (4.7) Additional required ESOP contribution (1.4) ----- ----- ----- ----- Net earnings before extraordinary items, as adjusted 54.9 7.9 58.4 7.9 Extraordinary item - loss on early retirement of debt, net of applicable tax benefit 2.6 2.6 ----- ----- ----- ----- Net earnings available for common and equivalent shares $ 52.3 $ 7.9 $ 55.8 $ 7.9 ===== ===== ===== ===== WEIGHTED AVERAGE SHARES: (In Millions) Common shares outstanding 35.8 35.1 35.8 35.1 Dilutive stock options outstanding .2 .4 Conversion of Series C preferred stock 1.6 Conversion of Series D preferred stock 4.0 ----- ----- ----- ----- Common and equivalent shares outstanding 36.0 35.1 41.8 35.1 ===== ===== ===== ===== PER COMMON AND EQUIVALENT SHARE: Net earnings before extraordinary item $ 1.52 $ .23 $ 1.39 $ .23 Extraordinary item - loss on early retirement of debt, net of applicable tax benefit (.07) (.06) ----- ----- ----- ----- Net earnings $ 1.45 $ .23 $ 1.33 $ .23 ===== ===== ===== =====
[FN] In August 1997, the Series D preferred stock was converted into common stock and no dividend was paid for the three-month period ended September 30, 1997. Amount represents the additional after-tax contribution that would be necessary to meet the ESOP debt service requirements under an assumed conversion of the Series C preferred stock. Amount represents the weighted average number of common shares issued assuming conversion of preferred stock outstanding. Amount represents the weighted average number of common shares not included in the number of weighted-average common shares outstanding to reflect the 4.4 million shares converted. EX-27 4 ART.5 FDS FOR 3RD QUARTER 10-Q
5 1,000 9-MOS DEC-31-1997 SEP-30-1997 20,500 0 256,500 17,100 291,900 644,300 529,400 216,600 1,297,100 403,400 278,500 200,300 0 49,700 98,000 1,297,100 1,391,600 1,391,600 101,400 225,900 (5,500) 0 25,300 84,500 24,700 59,800 0 2,600 0 57,200 1.45 1.33
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